In a test case, involving Wheels Common Investment Fund Trustees Ltd, the European Court of Justice (ECJ or CJEU) ruled that a common investment fund, in which the assets of several defined benefit (DB) pension schemes are pooled for investment purposes, cannot claim exemption from VAT on third-party management fees. This is because DB schemes do not constitute a ‘special investment fund’ (SIF) for VAT exemption purposes, as they are only available to employees of the sponsoring employer and scheme members do not directly bear the investment risk.

This decision will deny DB schemes within the UK the chance of reducing their annual ongoing costs by £100,000 and receiving a £2bn windfall from backdated VAT claims. At a time of financial difficulty, a windfall for pension schemes would have been a welcomed development. We await the next version of EU tax law for movement on this issue.

However, it is not clear whether the court would have reached the same conclusion if a defined contribution (DC) scheme had been a party. Whilst DC schemes are only available to employees, DC scheme members do bear the investment risk. It may be only a matter of time before a DC scheme draws attention to this issue.

There are other cases before the CJEU concerning the VAT treatment of pension funds:

  • the reference in ATP Pension Services (Case C‑464/12) considers whether pension fund management services should be VAT free under a different VAT exemption (ie not the SIF exemption) applying to money transfer services.
  • the reference in PPG Holdings (Case C‑26/12) also considers the entitlement of employers to recover VAT on pension fund management fees.

It will be interesting to see whether the CJEU allows pension funds to rely on other VAT exemptions in relation to supplies of management services.